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The Ultimate Movie Paradox ? RedBox vs Downloads

Riddle me this Batman. If Redbox can offer DVD rentals from Kiosks for $1 per movie, then why can’t online download services offer movies for overnight rental for the same $1 ?

The answer isnt quite so obvious. Redbox does two things very well.

First, they offer consumers an incredibly easy way to rent the most popular movies. They are the path of least resistance for movie consumption for many. You run by your 7-11, grocery store, whatever. There are the movies and they are only a dollar. Easy and breazy. You watch your movie on your TV.

Second, they do something for the movie industry that for the most part only Netflix also does. They pay minimum guarantees with no returns. In other words, a movie distributor can take an order from Redbox for say 500k units at $10 a DVD, with no returns and no resale of the DVD into the aftermarket. Redbox will actually destroy the DVDs. Thats a quick and easy $5,000,000 in hassle free revenue. With the emphasis on hassle free. From the studio perspective, thats $5mm in net margin that doesn’t require the overhead and actual costs of distribution and returns, along with the opportunity to spend less on marketing and advertising to promote the title. Redbox takes care of all of that.

Doing business with Redbox, despite the fact that it can negatively impact retail DVD sales can be good business for some movie distributors. Particularly for bigger movies. The brilliance of RedBox is that they reduce the revenue risk and increase the revenue for every title they take. Thats hard for any studio to walk away from.

Which begs the question of why don’t online movie rental companies do the same thing ? As I mentioned, Netflix is the ONLY company with an online offering that offers material minimum guarantees for movie titles. Everyone else offering online sales and rentals does so on a consignment basis. They put no cash upfront. They don’t reduce the risk for movie studios, they actually increase the risk. The big box retailers place an order for an actual number of titles, and then they do everything they can , along with the studio’s help to sell those titles. Online does nothing. They tell you that if you get lucky and it sells, you get paid. Whats worse, some of them will try to charge you to promote the titles. So you could actually owe them money for ads they place, and still not sell or rent any titles.

Which leads to the paradox.

Why don’t any of the pure online rental or sale companies offer the minimum guarantees that would allow them to be the Redbox of the online world ?

If anyone wanted to come in to the space and beat the hell out of Amazon, ITunes and every other “leading” movie and tv show download for sale or rental site, it would be expensive, but it would be easy. Go to the leading movie studios and production/distribution companies and offer them some big guarantees in exchange for online exclusivity. Content would disappear from the other sites and run to the new site faster than they could cash the check. The same could apply to Youtube and Hulu as well.

In these uncertain times, the certainty of money in the bank vs the absolute uncertainty of selling or renting content on consignment is of incredible value to studios and production companies. As is the certainty of money in the bank vs the uncertainty of advertising revenue around content is a powerful aphrodisiac. Its an amazing opportunity for someone with cash to turn the industry upside down. They could even take it one step further and create output deals that lock up the EXCLUSIVE online exploitations of movie and tv content at the time its being released. The money paid could be based on box office revenues for movies and ratings and longetivity for TV shows.

So why hasnt an existing pure online vendor stepped up and made the commitment ? Because they aren’t very good at selling or renting content. Walmart knows how to sell DVDs. Best Buy knows how to sell DVDs. Blockbuster knows how to rent and sell DVDs. Netflix knows how to “rent” DVDs. Redbox knows how to rent DVDs. They all make commitments to product. Online vendors will only buy on consignment. To me that means they have no idea how to monetize content. Amazon, Itunes, Hulu, Youtube all know how to aggregate huge volumes of content and create volume in total. None know how to monetize specific titles like their offline competitors do. Netflix is the only company in the aggregation business with the ability and brains to offer guarantees, but they have the foundation of their subscription business to carry them. They also have the risk of a huge infrastructure that could hold them back.

The first pure online company to come along that can demonstrate a reliable ability to monetize content online and can offer guarantees, will turn the industry upside down. Just as Redbox has done.

31 thoughts on “The Ultimate Movie Paradox ? RedBox vs Downloads”

Speaking of movies,Mark,if you still own Landmark Theatres (if i’m not mistaken.) you REALLY need to talk to the woman who does the booking for the theatres in Seattle,especially the Midnight Movies at the Egyptian Theatre,up on Capitol Hill. For about the last 5 1/2 years now,it’s been nothing but the same boring picks again and again. I can recall suprising picks like Wisconsin Death Trip,or a new print of Cannibal Holocaust,but for the longest time,it’s just been Donnie Darko and a muppet movie.

1) Only some of the distribution deals require destruction of the DVDs. That’s why Universal and Redbox are currently in a lawsuit. Redbox released Universal’s demand letter and it reeked of antitrust (blatant price fixing, agreements of non-competition, etc).

2) None of us software guys are going to put up money, because we’re intelligent enough to know what Hollywood accounting is. Every major studio has multiple lawsuits against it at any given time from directors, producers, and actors demanding proper royalties. They’re absolutely not trustworthy business partners, and when they hold the keys to the promotion of the content, we’ll give them a substantial cut of profits, but it’ll be a cold day in hell before we hand over a huge chunk of our VC up front. It reeks of those sales pyramids typically seen with “high end” cosmetics.

3) Cost of distribution is something that also needs to be addressed. Netflix says that after factoring in maintenance and initial capital, it currently costs them roughly 6 cents to deliver a movie (and that number is only shrinking). Why should I pay a studio $10 per transaction that costs only 6 cents? When you consider the fact that it’s completely up to the studio to decide whether they’ll promote the movie, the fee structure is laughable. And unlike physical distribution, I only need a single copy for digital, so most of the expenses are in negotiating the deal. I’d be paying almost $10 of pure profit per transaction to studios who prey on partners that they actually need… imagine how they feel about partners like myself who are easily replaced.

4) You are correct in the disparity of pricing — the studio deals for digital distribution are laughably non-competitive. Historically, pay-per-title downloads (Amazon, iTunes, and all the failed startups) cost MORE than the current market value of the actual DVD. And, digital movie downloads are always DRM laden files that typically require calling home every so often (to key servers that historically have stayed up for only 2 or 3 years). These aren’t purchases — they’re rentals of probably about 2 or 3 years. Every VC knows that to get a tech product out, you have to get the geeks to adopt it first, but no geek is going to pay MORE for a laughably shoddier product, especially when the best product is available elsewhere for free.

There is another paradigm, short in coming, that will quickly overtake the current one. It is the completely wireless solution. It cuts all of this “download vs offerings” argument out because it essentially delivers everything, such as videos, documents, etc, to you whereever you are.

This now gives the power of distribution to the big content providers who are apt to take it and sell 100% of advertising for themselves. Imagine how big Viacom would be if they could collect 100% of advertising instead of sharing it with broadcasters and cable companies? They would instantly increase in size three-fold.

Services, like what Hang 10 Technologies (hang10tech.com) offers through their vuivision.com website, can be utilized to bring 100% content to individuals whereever they are. Hang 10 is also offering content providers HDTV through their new encoding and indexing system, over wireless networks, at very low bandwidths. No downloads, no aps, no iPhone required. How long before the content providers realize they hold all the cards?

Why pay cable or TV broadcasters, or deal with them, when the content providers have an unlimited, widely distributed broadcast medium to distribute their content at a fraction of the cost that it is currently be offered at?

My guess is that the ESPNs and Viacoms of the world realize this and are just waiting for the right moment to pull the plug on broadcast/cable and start dealing with the future broadcasters, Verizon and AT&T.

For this reason your blog, and today’s current business offerings, are suffering from an old paradigm or perhaps the one that is fading… quickly.

Mr. Cuban,
I am also from Pittsburgh and also am a Pirates fan. I am hoping to reach you for some advice on what can be done to change what Bob Nutting is doing to our team. Please help if you can. The local media is helpless and we need to gain some leverage somehow to change this for the better. Thank so much…simonetti22@msn.com

A few reasons I can think of are the fact that a lot of ISPs are starting to or are threatening to limit bandwidth and implement other price gouging techniques.

Not to mention many big companies do not support net neutrality, so ISPs would be free to throttle ports used by said online video providers rendering their services useless. Especially when it comes to 1080p or higher content.

If you are someone interested in Netflix and the history of video rentals, you might want to check out this new site called The Story of Video Mailbox. It describes a small company, way back in the 1980’s, that pioneered many of the video rental processes that Netflix and others use today (e.g. using a rental queue, unlimited rentals for a flat fee, mailing movies in pre-paid shipping boxes, etc). Check out:

Anyone who thinks they’re going to get rich by offering online HD distribution to content providers is sadly mistaken. If there is a robust market for online distribution what’s the barrier to them doing it themselves? HULU being the prime example.

Mark, huge fan. I have ideas for various industries almost every day, but have little expertise and I am not sure how to monetize. Suggestions welcome!

On this topic, Microsoft can corner the market and not look back. Not only do they have the money, but a successful platform on which to deliver. (Disclaimer: I do not work for MSFT or own any stock). On the Marketplace, you can purchse HD TV/Movies for a few bucks. Perhaps rentals come down the road for $2 or $3? With Xbox 360, I can also access Netflix Watch Now. Best of both worlds for $200 and an internet connection. MSFT has the money to offer a guarantee and not blink. My guess is something is in play beyond money. Of course, MSFT has done a piss poor job of marketing Xbox to non-gamers. It is a fully functioning and easy to use version of what Apple TV promised to be. So why not rent a movie for a couple bucks and have it active for 48 hours? Who’s buying? I am. Coming from a loyal Netflix subscriber, that should open some eyes.

Perhaps this isn’t an issue with a non-risk-taking distributor, but major studios not wanting to miss out on future revenue.

The current DVD model isn’t all-that-different from VHS/Blockbuster days. Buy in bulk, rent enough to cover that back, plus some. Redbox is a good idea for placement and ease, but not really different than renting years ago.

Downloads will inevitably become mainstream. I know some commenters here are focused on computers, but it could be from anywhere: gaming systems, cable boxes, etc.

These are easily trackable and with far less physical product to produce, maybe studios are just interested in maintaining a cut of the action. It may not be beefing up the bottom line now, but it’ll eventually bring in much more than just forking over 500k DVDs at a discount with far less effort.

This isn’t tomorrow, but it’s not sci-fi either. I do find it hard to believe any major corp is this patient, but if they are, it’ll payoff IMO.

Netflix offers subscribers (for free) the ability to watch movies instantly online or on their televisions if they have a Roku box or a certain type of Tivo or Bluray player. However, right now they only have deals with certain companies to release their movies and television shows in this medium. They recently signed CBS and Disney which exponentially increased the number of titles. As a Netflix customer I will be excited when they make some moves to include more new releases to the “Instant/Online” category.

Why is there a need to be a pure online company when they can offer the best of both worlds?

They sell on consignment because the believe that your product should prove itself in the marketplace before you get paid for it. That distinction has been the entire flash point of the war of the online marketplace vs. old-world capitalism. And it’s a concept which gives people like Mark Cuban a lot of angst because they believe that *producing* a product is all that you should have to do in order to make money from it. And with the old distribution and marketing structures, that was true — but not so anymore, where The Girlfriend Experience and The Dark Night have an equal playing field for Netflix sales.

As a side note, I’ve always thought that Netflix could slay Blockbuster once and for all if they purchased RedBox. That would allow them to compete with Blockbuster’s “Bring your mailer, get another movie from our physical location” convenience appeal. But perhaps I’m wrong according to the distribution argument.

If anyone wanted to come in to the space and beat the hell out of Amazon, ITunes and every other “leading” movie and tv show download for sale or rental site, it would be expensive, but it would be easy. Go to the leading movie studios and production/distribution companies and offer them some big guarantees in exchange for online exclusivity.

WAIT

and you forgot DirectTV and Comcast and Time Warner Cable and Fios and uVerse..etc. The stakes are much higher than you think and the players have deep pockets. If you train consumers that new release movies are worth $.99; they will look to all of the above players to match that number and the entire Home Entertainment VOD marketplace will collapse. Plus, there are existing digital output deals that many of the key players have which would preclude “exclusives” unless they invest in the film. You know better than most that the film business is not paved with profits.
Redbox is about conveinience. 7-11 does not match Walmart’s pricing on Milk…because they dont have to. They get a premium for convienience. Redbox should either increase pricing or move availability down to the VOD window so consumers don’t want movies such as “Avatar” (which cost over $300m) for $.99. If we go to that model; you wont see movies like “Avatar” and “Dark Knight” being made anymore….viewers will be relegated to watching movies such as “The Girlfriend Experience” 🙂

BY THE WAY – the long term future of Cable/Satellite providers’ years are numbered in their current business model and I have know this for over ten years.

They will not be able to compete with iHDTV technology so they will have to become a internet service provider with some exclusive content channels.

There are several iHDTV technologies including one University so it is just a matter of time before EVERY website in the world becomes its own TV channel and that’s a whole new ball game when it comes to marketing and advertising.

Today 500 channels on Cable – tomorrow 50 Million over the internet and one of the biggest computer company’s SERVERS in the world will host this technology for quality and redundancy.
From MC> not going to happen. sorry. be careful

Computer kicked me out – weird – Anyway high powered attorneys in the entertainment industry plus quite a few celebrities have put in several million – I am putting together a Social Network Media program which uses music, movies and games as the platform and online movie rentals is part of that.

If you want to check out the iHDTV technology and see it demonstrated – let me know. I cannot afford to back up what I’m telling you as to many people know me in this business and you will flip out and get excited at the reality of this technology – which is here in LaLa Land California! LOL

Hey Mark – There is something MAJOR in the works right now and it is HDTV through the Internet – RIGHT NOW! No hiccups – no pixalated pictures and up to eight picture in picture windows – ALL with moving media streams with NO loss of quality!

This is being launched and is the second stage of funding. I have personally been to many demonstrations and a good friend of mine is involved with the Company here in LA and q

Don’t forget their fear of piracy. I don’t know if they would be very apt to hop right out of their perceived frying pan and into the fire. But, that being said, maybe the money in the bank aspect is what they need to push them over the edge into the new realm of digital commerce…

You are incorrect about how Redbox operates. They return to the distributor for re-assembly to sell in discount dvd bins in pharmacies.
From MC> Its negotiated on a deal by deal basis. The smarter distribs have them destroy the DVDs

This conversation to me strikes at the very heart of the future of on-line commerce. The age old challenge of developing ways to derive revenue from high-value content simply has not adapted well to the digital world. In my opinion, the primary reason for this is we simply don’t have the necessary technology in place to allow people to literally vote with our dollars. Instead we have all these crazy permutations of free/ad-revenue/membership models.

What I would really like to be able to for everyone that I get content from is pay them directly. I do this for a handful of blogs I read that allow me to donate via Paypal. Paypal unfortunately is the closest thing we have to a universal on-line payment system that allows us to both make one time or recurring payments fairly easily.

I think a pending (r)evolution of the net will come in this arena of who and how we pay for content in the future.

The big reason is the huge disparity for the retailer in potential earning per rental. The misnomer is that Redbox charges just $1 per rental. But they actually charge $1 per rental per night. With a physical DVD, Redbox keeps making money until the DVD is returned whether it was viewed 20 times or not at all. The quality of a movie has no impact on revenue.

With online “rental,” though, if I start watching a movie and it stinks, I’ll stop watching. With Netflix, there’s no extra charge, but if some other online retailer tried to make me pay for 5 minutes of a movie, it would be the last time I used their service. I would never keep it for another day. And I would never “rent” it before I was ready to watch it. No one wants to guarantee the studio a minimum return on online rentals because the potential for retail revenue has a very low maximum.

From personal experience, I have rented a Redbox film, intended to watch it, kept it a few days until realizing I no longer had time, and then returned it without seeing it. That experience cost me $5, but I didn’t blame Redbox. I’m an idiot, they’re geniuses, because that experience won’t stop me from renting from them again.

Bottom line, you can make a sweet deal with the studios and even secure online exclusivity–but that won’t make customers pay enough for it to make it worth your while.

Isn’t the promise of the web supposed to be that content creators can connect directly to their consumers? Why do we still need a middle man in the age of the Internet? Why can’t studios/production companies sell/rent directly to the public?

If online vendors “aren’t very good at selling or renting content”, then creators should take the initiative and get good at it and do it themselves.

From MC> because there are millions and millions of websites and the cost to enable the consumer to find yours is huge. Its the same problem on aggregators. There are hundreds of millions of video on youtube and songs on Itunes, how does a consumer find yours ? Thats an expensive proposition